Monday, October 20, 2008

Kaldor's Contributions: An Impressionistic Survey

IntroductionThis post gives a quick overview of my impressions of the contributions to economics of Nicholas Kaldor. In writing this post, I deliberately did not review the entries on him at Gonçalo Fonseca's site on the history of economic thought, in the New Palgrave, or at Wikipedia. I did use Turner (1993) for the biographical details.

BiographyI will be brief on the biography of Lord Nicholas Kaldor (12 May 1908 - 1986). Born in Budapest, he later studied at Berlin. He transferred to the London School of Economics (LSE) as an undergraduate in the Fall of 1927. Kaldor visited the United States, including Harvard and Princeton, in 1935. He moved to Cambridge in 1939, with the evacuation of the LSE to Cambridge, and stayed on at Cambridge (King's College) after the war. He joined the United States Strategic Bombing Survey under the direction of John Kenneth Galbraith. He became a Baron in 1974 and was the president of the Royal Economic Society in 1976. Kaldor's wife was named Clarissa, and they had four daughters. Anthony P. Thirwall was named his literary executor.

1930sEconomists in the 1930s had, once again, a controversy on the theory of capital, with Frank Knight on one side and Friedrich A. Hayek and Fritz Machlup on the other. Early in his career, Kaldor (1937) surveyed that dispute. He followed up with investigations (1939a, 1942) of Hayek's capital theory and exposition of the Austrian Business Cycle Theory. Although Kaldor's judgments are sharp, I think these articles might have been more convincing if the standard of the time allowed for more mathematics.

I don't recall ever reading Kaldor's original contributions to welfare economics. Apparently, he had an article in the 1939 volume of the Economic Journal. This article and one by J. R. Hicks are the primary source of the famous Hicks-Kaldor compensation principle.

Apparently the younger economists at Cambridge and LSE, such as Robinson and Kaldor, respectively, met once a month to debate macroeconomics even before the publication of Keynes' General Theory. Kaldor became a convert to Keynes, as can be seen in Kaldor (1939b). Barkley Rosser, Jr., tends to cite Goodwin and Kaldor as early explorations of non-linear dynamics in economic models. Maybe Kaldor (1940) is important here, which I have not read in at least a decade, if ever.

Later Work on Growth and Distribution TheoryKaldor's later work on growth and distribution is more clearly Post Keynesian, in my opinion. His 1956 paper compares and contrast three theories of distribution: a neoclassical theory which makes most sense with a now exploded scarcity theory of value, a classical theory in which wages are exogeneous in the theory of value and distribution, and a Post Keynesian theory in which the distribution of income depends on macroeconomic savings propensities. I think this paper led to the souring of his relationship with Joan Robinson; she was, I guess, worried about priority in publication. Luigi Pasinetti disputed the logical consistency of Kaldor's presentation, in which workers obtain income from capital but save that portion of their income at the higher rate characteristic in Kaldor's model of savings out of profits. In a later seminar with Pasinetti, Robinson, and Samuelson & Modigliani, Kaldor (1966) clarified that he thought of the savings rate as pertaining to the source of income, not the individual savers. This ties into the idea that savings out of retained earnings is not transparent to those holding stock in corporations. Kaldor suggested these ideas can explain how the market value of corporate stock relates to the book value of the assets owned by corporations. Later work by others demonstrate that for two classes to persist in Kaldor's model, the rate of profits must exceed the rate of interest (i.e., the return to capital obtainable by workers in the financial markets they have access to). This may not be a good idea, but perhaps it would be an interesting idea to synthesize this literature with literature related to De Long et al (1990) - and I would prefer not to reference Shleifer.

Kaldor developed a related series of growth models. He presented one at the famous August 1958 Corfu conference. I guess it was in this paper he presented his "stylized facts". He presented another model in this series (Kaldor and Mirrlees 1962) in the same issue of the Review of Economic Studies in which he welcomed (1962) Arrow to the band of heretics for his "Learning by Doing" paper. Kaldor's models use a technical progress function, which, I gather, is empirically indistinguishable from a Cobb-Douglas production function with technical progress.

Kaldor emphasized increasing returns in manufacturing in these models, and he championed Verdoon's law. Thirwall (e.g., 1986) applies these ideas to developing economics. I gather a policy recommendation in this literature is for export-led growth. An emphasis on increasing returns underlies Kaldor's (1972, 1975, and 1985) mature criticisms of neoclassical economics.

Finally, I want to mention Kaldor's theory of endogenous money. Kaldor described both the inability of monetary authorities to control the supply of money under some given definition and the ability of financial institutions to continually evolve new instruments to serve as money. He used these ideas to refute monetarism (1986, first edition 1982).

4 comments:

Anonymous
said...

"I want to mention Kaldor's theory of endogenous money."

I think that this aspect of his ideas are very important, given the central place banks and credit creation have in any modern economy. That the experiment in Monetarism confirmed his analysis is also significant.

Thatcher's government could NOT control the money supply, try as they might. They raised interest rates to reduce the demand for credit, deepening the recession, raising unemployment and so, eventually, lowering inflation by weakening labour's ability to resist the real wage cuts caused by inflation.

So Kaldor managed to expose the flaws in two winners of the so-called Nobel Prize in Economics. In the case of von Hayek, it was precisely for what he got the prize for! In the case of Friedman, it was the centre piece of his ideological framework.

Still, I guess being right in an unorthodox way is far worse than being proved wrong within the orthodoxy!

I agree that refuting Hayek and Friedman at different points in his career is an important aspect of Kaldor's work. But I wanted to note how wide-ranging and varied his contributions were.

The theory of endogenous money is important for understanding the economy, independent of refuting Friedman. One idea I get out of both Kaldor and Minsky is that we'll never have a final set of regulations and institutions for capitalism. In particular, financial institutions will evolve such that what was a good set of regulations some time ago will need to be changed.